Impact of emission reduction investments on decisions and profits in a supply chain with two competitive manufacturers

Abstract

Large amounts of carbon emissions not only contribute to global warming but also to air pollution, such as thick haze in China. For the sake of the harmonious development of the economy and environment, many countries have imposed mechanisms or policies to curb carbon emissions. On this basis, we study a supply chain in which the retailer sells two substitutable products made by the two competitive manufacturers under the cap-and-trade regulation. Then we find that consumers’ low-carbon preference (CLP) and carbon trading price are key factors affecting the manufacturers’ operation decisions. When considering CLP, investing in emission reduction technologies is the optimal strategy for the manufacturers. If CLP is larger than carbon trading price, one manufacturer’s profit can be increased by the rival’s technology investments. This result implies that under certain conditions one manufacturer’s emission reduction investments increase not only her own profit but also the rival’s profit, which means the two manufacturers could jointly develop emission reduction technologies to achieve a win–win situation. Our findings also suggest that a fierce emission reduction competition benefits consumers from a decline in price but harms the supply chain members and the environment due to decreased profits and more emissions, respectively. The results also demonstrate that the manufacturers’ emission reduction investments are always beneficial for the retailer. Thus real-life retailers could motivate manufacturers to reduce emissions through sharing the cost of emission reduction.